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The Energy (Oil and Gas) Profits Levy Bill would provide the legislative basis for a new ‘energy profits levy’ on oil and gas companies operating in the North Sea. The government’s plans for the levy package, which includes an investment incentive, follow earlier calls from the Labour Party for a “windfall tax” on the profits of North Sea oil and gas companies in the light of rising world oil and gas prices.
Then Chancellor of the Exchequer Rishi Sunak announced the new tax in a statement to the House of Commons on 26 May 2022, to be effective from that date. (The statement was repeated in the House of Lords later that same day). The government has said the levy is “temporary and will be phased out when oil and gas prices return to historically more normal levels”. It has included a sunset, or expiry, clause in the bill that would ensure the tax does not apply beyond 31 December 2025.
The text of the bill as introduced in the House of Commons was published on 5 July 2022, together with accompanying explanatory notes. This followed House of Commons approval of a ways and means resolution earlier that day giving consent for the new levy. As with the annual Finance Bill, this was debated after a chancellor’s statement but before a bill had been brought forward. Before this, the government had held a short, week-long consultation on a draft bill and draft explanatory notes. This followed an earlier technical note and factsheet on the energy profits levy published to accompany Mr Sunak’s May 2022 statement. In addition, the government has committed to publishing a tax information and impact note to accompany the bill, although at the time of writing this was not yet available.
The government plans to fast track the bill through both Houses, with second reading and all remaining stages scheduled to be taken in the House of Commons on 11 July 2022 and in the House of Lords on 13 July 2022. In the bill’s explanatory notes, the government argues that fast tracking is necessary to “provide certainty as to the nature of taxpayers’ liabilities and entitlements under the levy and to curtail, as far as possible, the period in which the legislation is to operate retrospectively”.
Speaker Hoyle is expected to certify the bill as a money bill before it leaves the House of Commons, on the basis that it is concerned only with national taxation. This will limit the extent to which the House of Lords can propose significant changes. The House of Lords can amend money bills, but the House of Commons is not obliged to consider any amendments the Lords may propose. The latest edition of the ‘Companion to the Standing Orders and Guide to the Proceedings of the House of Lords’ notes that “on a few occasions minor amendments have been made by the Lords to such bills and have been accepted by the Commons”. However, a money bill can also be presented for royal assent a month after being passed by the House of Commons with or without the approval of the House of Lords.
Other measures announced in Mr Sunak’s May 2022 statement have been the subject of fast-tracked legislation. The Social Security (Additional Payments) Act 2022, which gives effect to the cost-of-living support measures for benefits claimants also announced in the statement, received royal assent on 28 June 2022. It was also a money bill that was fast tracked through both Houses.
2. What is the bill expected to do?
The Energy (Oil and Gas) Profits Levy Bill would provide for a new 25% surcharge tax on the profits of oil and gas companies operating in the UK and the UK continental shelf. This will be known as the energy profits levy. It will increase the headline rate of tax on the profits of such companies from 40% to 65%. Affected companies currently pay three separate profit-based taxes on oil and gas production, ring fenced to prevent losses from other activities being imported into the regime. These comprise:
- ring fence corporation tax, charged at 30% since 2002
- a supplementary charge, charged at 10% since 2016 (when the charge was reduced from 20%, having been 32% between 2011 and 2014)
- petroleum revenue tax, charged at 0% since 2016 (when it was permanently zero-rated to allow some companies to carry back trading losses and decommissioning costs)
Total receipts from these existing taxes were £3.1bn in 2021/22. The government estimates that the 25% surcharge will raise an additional £5bn in the first 12 months of its operation, with proceeds earmarked to contribute towards the £15bn of cost-of-living support measures also announced on 26 May 2022. It has also explained that fewer than 35 groups have made tax payments under the 40% regime each year in recent years, and that in 2021/22, the top seven of these accounted for around 95% of payments.
The government has said that companies will not be able to offset previous losses or decommissioning expenditure against profits subject to the levy. However, the levy will include an 80% ‘super-deduction’ style investment relief, known as the investment allowance. The government has explained that this “will mean businesses will overall get a 91p tax saving for every £1 they invest—providing them with an additional, immediate incentive to invest”. It added that the allowance “nearly doubles the tax relief available and means the more investment a firm makes, the less tax they will pay”. It has stressed that the allowance will be “available to companies at the point of investment”. This contrasts with allowances against the supplementary charge, which can only be claimed once income is received from the field subject to the investment. In some cases, this can take several years. The government expects the allowance to lead to an overall increase in investment.
The government has said that although the levy does not apply to the electricity generation sector, it intends to “urgently evaluate” the scale of the “extraordinary profits” evident in the sector before considering the “appropriate steps to take”. The government has since said that “officials are urgently engaging with industry stakeholders […] to gather evidence on energy generators’ level of profitability and the operation of their business models”, before it decides on “appropriate action” in due course.
In its factsheet published to accompany the chancellor’s statement on 26 May 2022, the government cited a precedent for a tax on exceptional profits. It observed that “in 1981, a one-off tax on certain bank deposits was introduced via a 2.5% levy on deposits of banking businesses, who were benefiting from high interest rates”. The 1997 Labour government also introduced a one-off tax on privatised utilities.
The draft bill published for consultation contained 19 clauses and two schedules. The text of the bill introduced in the House of Commons contained the same number of clauses and schedules. The bill’s explanatory notes said that following the consultation, the government had made:
[…] among other minor changes, changes in relation to determining the extent to which a repayment of petroleum revenue tax is subject to the levy (clause 1) and to amend the wording in clause 5 on qualifying purposes to make it clear that it does not apply to transactions with a genuine commercial purpose.
3. Summary of House of Commons proceedings
3.1 ‘Economic update’ statement: 26 May 2022
During his statement on 26 May 2022, Rishi Sunak, then serving as chancellor of the exchequer, set out the case for the levy with an in-built investment allowance. He argued that it was “possible to both tax extraordinary profits fairly and incentivise investment” and on that basis the government had decided to “introduce a temporary targeted energy profits levy”. He added that the levy would include a “new investment allowance similar to the super deduction, which means that companies will have a new and significant incentive to reinvest their profits”.
After today’s announcement, let there be no doubt about who is winning the battle of ideas in Britain—it is the Labour Party. Today, it feels as though the chancellor has finally realised the problems the country is facing. We first called for a windfall tax on oil and gas producers nearly five months ago, to help struggling families and pensioners. Today, he has announced that policy but he dare not say the words; it is a policy that dare not speak its name for this chancellor.
Ms Reeves went on to say that it was also “good to see the SNP u-turning today and saying that they, too, are in favour of a windfall tax on oil and gas profits—well done to the SNP”.
Speaking for the SNP, Kirsty Blackman alleged the announcement had been timed to distract from the Sue Gray report before saying she was “glad that the chancellor has put in place the windfall tax”. However, Ms Blackman added that she was “very disappointed that it covers only oil and gas companies”. Instead, she argued that it “should have gone much wider”.
Christine Jardine, Liberal Democrat spokesperson on Treasury matters, greeted the announcement with the word “finally”. She added: “Liberal Democrats were calling on the chancellor to bring in a windfall tax on the excess profits of energy companies in October , when it could have made a difference in the winter”.
3.2 Ways and means resolution: 5 July 2022
Financial Secretary to the Treasury Lucy Frazer opened the debate on the motion that would approve the imposition of the new levy. She made the case for the new tax as follows:
I would like to touch on how the bill ensures that we tax extraordinary profits fairly while incentivising investment. To do that, we are introducing the energy profits levy, a new 25% surcharge on the extraordinary profits that the oil and gas sector is making. At the same time, the new 80% investment allowance will mean that businesses will, overall, get a 91p tax saving for every £1 they invest. This provides them with an additional immediate incentive to invest. That nearly doubles the tax relief available and means that the more investment a firm makes, the less they will pay. As set out in the energy security strategy, the [North Sea] will still be a foundation of our energy security, so it is right that we continue to encourage investment in oil and gas. The government expects the energy profits levy, with the investment allowance, to lead to an overall increase in investment.
Ms Frazer also commented on how the government had consulted with the sector on the bill:
We have also been listening closely to feedback from industry. We published draft legislation for the bill on 21 June  to seek technical feedback. Two weeks ago, the former chancellor met industry stakeholders in Aberdeen to discuss the levy—not just to communicate the aims of the levy and how it will fund vital support for families, but to ensure that the levy works as the government intended. That is why I can confirm that the government is making a change to the legislation. I confirm that tax repayments that oil and gas companies received for petroleum revenue tax related to losses generated by decommissioning expenditure will not be taxed under the levy. Since wider decommissioning expenditure is also left out of account for the levy, that change is consistent and fair. We are very grateful for the engagement that we have had with industry on the matter. When the bill is published, this will be made clear. To reassure the House, with this change, the government still expects the levy to raise about £5bn over the next year.
James Murray, speaking on behalf of the Labour Party, argued the bill was evidence that the government was “finally introducing a windfall tax on oil and gas producers’ profits more than seven months after the shadow chancellor […] first set out Labour’s plans for one”. Mr Murray said that the Labour Party would “urge ministers to make right their delay in introducing the windfall tax” when the House considered the bill. He then proceeded to criticise the investment allowance aspect of the levy package, alleging that it “could lead to a third or more of any revenue from the new levy being handed straight back to the oil and gas producers”. He said the opposition would “urge ministers to think again about that unnecessary tax break for oil producers, which will undermine both the impact of the windfall tax and our country’s wider efforts to tackle the climate crisis”.
Speaking for the SNP, Alison Thewliss said her party had been “consistent in calling for a windfall tax on excess profits since June 2020, in response to the soaring profits then being made by Amazon and other online retailers during the pandemic”. She added that it was “disappointing that this UK government, and indeed the official opposition, have looked only narrowly and in a limited fashion at oil and gas and ignored all the other areas where super-extraordinary profits have been soaring during this pandemic”. Ms Thewliss continued by saying that Scotland’s oil and gas resources were being “used yet again to bail out the UK Treasury”.
If a windfall tax had been brought in then, £3bn more would already have been raised for the exchequer. That is £3bn that could have been used to offset the hardship faced by families and pensioners up and down the country who are struggling to cope with the cost-of-living crisis.
Ms Jardine concluded by saying that she hoped the next chancellor would “change the windfall tax to help it raise more money” and that they might “reconsider the money that will go into fossil fuels rather than green technologies” before the House considered the bill on 11 July 2022.
4. Read more
- UK Parliament, ‘Energy (Oil and Gas) Profits Levy Bill’, accessed 7 July 2022
- House of Commons Library, ‘Energy (Oil and Gas) Profits Levy Bill 2022–23’, 6 July 2022
- House of Commons Library, ‘Taxation of North Sea oil and gas’, 22 June 2022 (see in particular pages 48–65 for an overview of external reaction to the proposed levy)